Structuring Compensation For Sales
You want to attract great sales talent but at the early stages of your venture you may not have the cash or great organizational support in the form of marketing and sales budgets or a track record for your product or service. So how do you structure the sales compensation to attract talent in a ways that meets the company goals and rewards the sales professional. In this lesson we show you a framework to help you structure sales compensation.
You of course are going to try to show sales professionals that they should take below market salary for the opportunity to work for your company. That may not work or you may have to show the sales professional how you are going to make up any deficit with additional upsides or opportunities.
The Elements of Compensation
On the financial side, the elements of compensation at your disposal are the following:
- Base Salary
- Commissions
- Bonuses
- Commission Earning Rules
- Payout Rules
- Equity
You are trying to strike the delicate balance of preserving your venture’s scarce resources with attracting the talent to drive revenue growth. Here are some techniques to try to strike that delicate balance.
“LINING UP COMPENSATION TO THE DESIRED RESULTS IS THE KEY.”
Techniques to Create Compensation
You are generally going to have to pay “market rates” for salary based on your market and industry. In sales comp, you should set a Target Compensation – let’s pick $84k as a basic number to work with – the sliding scale now becomes the mix of salary to at-risk compensation, usually commission. In this case, the total compensation is at or near market rate for the position, given the industry and market.
- Ask for Lower Base in Exchange for Higher Commission Rates. If a candidate is willing to take a lower base in exchange for a higher commission than your norm, that’s a good deal for you. If he or she ends up making a lot of money, that’s a win-win for everyone.
- Start with a 50/50 Blend. Start with a 50/50 blend to start ($42k salary and $42k commission). This assumes that the product is relatively straight forward to sell and that the sales process is more predictable.
- Adjust Based on Maturity and Risk. If that sales process isn’t predictable, you’ll likely have to be more of a 75% salary, 25% commission. If you’re super early, in your product release cycle, the mix could be 90% salary and 10% commission but usually this is a sign that you have hired too early.
- Avoid Commission Only. While there are some industries in which commission only structures work, it is rare that these structures work. The “you get what you pay for” almost always holds true. Be wary of anyone who is willing to work for commissions only unless they have been incredibly thoughtful in vetting the opportunity and setting some upside in stone.
- Avoid Capping Upside. Avoid capping people on the upside especially if they are willing to accept less base compensation. This sends the wrong message that even though they are willing to take risk, you are not willing to reward them handsomely if they kill it on the upside. Bad message with little benefit.
- Pay Quickly. Especially is salespeople are taking lower base salaries, pay them as soon as you can after the company has received the cash. This sends a good message and encourages them to take more risk. Many salespeople are turned off by the risk of not getting paid especially in a startup in which cash is constant topic of conversation.
- Add Equity. Salespeople typically don’t receive equity because unlike other team members, they are compensated on revenue that comes in. If you add some equity in the form of options upon the achievement of sales goals, this is an upside they generally cannot get in traditional sales jobs in the marketplace.
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